A NEW PERSPECTIVE ON UNDERINVESTMENT IN AGRICULTURAL R&D

far larger portfolio of profitable agricultural R&D investment opportunities than the developing
countries have. Their optimal R&D intensity (i.e., public agricultural research expenditures as a
percentage of AgGDP) stands at 2.8%, compared to 1.0% for developing countries (figure 5b).

A differentiation of the R&D opportunity curve for developing countries by regions is
presented in figure 5c. Although the actual R&D intensity for all three regions clusters around 0.5%,
their estimated optimal R&D intensity ratios differ quite significantly: 0.9% for Africa; 0.6% for Asia;
and 2.0% for Latin America. The robustness of these latter estimates is rather weak given the small
number of rate-of-return observations per region. Nevertheless, it illustrates how, with sufficiently
good rate-of-return data, some far-reaching conclusions regarding underinvestment in agricultural
R&D could be derived.

In figure 5d, the R&D opportunity curves have been plotted for two different time periods.
The results of the rate-of-return studies published in and before 1985 have been related to the
expenditure level of 1961-65, while those published after 1985 are related to the expenditure level of
1981-85. The figure shows how, for both developed and developing countries, the R&D opportunity
curve has shifted outward. If the R&D opportunity curve had not changed, the increase in R&D
spending would have reduced the implicit cut-off rate and, hence, the underinvestment gap. For
developing countries, this would have brought the cut-off rate close to 25%, while for developed
countries the cut-off rate would have dropped below zero.

An implicit assumption frequently made in the literature as well as in policy advice is that the
R&D opportunity curve is the same across countries and over time. For example, the recommendation
made by the World Bank that developing countries should invest 2% of their AgGDP in agricultural
R&D by 1990 (World Bank 1981) is based on this assumption. The developed-country investment
level of the early 1980s is taken as the target, and assuming that all countries are on the same curve,
closing the underinvestment gap is a matter of moving along a fixed curve. If the advice had been
followed, developing countries would have overinvested in agricultural R&D by quite a margin. The
results of the current analysis suggests that for 1981-85 the optimal investment level for developing
countries was about 1.0% (rather than the actual 0.4%) and that for developed countries, it was about
2.8% (rather than the actual 2.0%). It is important to realize that even at modest investment levels,

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